Some Insurers Say Others Are Gaming UL Reserving Guideline

The result, they say, is unfair competition because reserves are less than they should be

By Jim Connolly

Several large life insurers contend that some companies are sidestepping the intent of a reserving guideline for universal life products with shadow accounts. This is resulting, they say, in reserves that can be less than half of what they should be and creating unfair competition in a market that is already competitive.

Shadow accounts are funds in a UL product that have premiums and interest credited to them only for the purpose of keeping a policy in force. A policyholder does not have access to the amount credited to the shadow account. But if the shadow account has value in it, the contract remains in force in spite of the amount in the actual account.

Guardian Life Insurance Company, New York; Hartford Life Insurance Company, Hartford; and, Northwestern Mutual Life Insurance Company, Milwaukee, raised concern that the Application of the Valuation of Life Insurance Policies model regulation, known as Actuarial Guideline AXXX, is being abused.

Guideline AXXX was developed to curb abuses that regulators say arose following the implementation of Guideline Triple-X, which established standards for reserving for level premium products including term and UL.

Regulators at the National Association of Insurance Commissioners say they are willing to look into the matter. In fact, Texas regulator Mike Boerner says he already is trying to see if strained assumptions are being used with these products but adds that his work is still under way.

But regulators also say they need real examples before they proceed. Have you seen any specific examples in the marketplace? Leslie Jones, a South Carolina regulator, asked company representatives. These companies say they dont have specific examples. Rather, it is more informal evidence such as talks given at actuarial seminars that suggest ways to lower reserving requirements.

These insurers say the manipulation of shadow account expense factors violates the letter and spirit goal that regulators specified in the model.

Bill Koenig, a senior vice president and chief actuary with Northwestern Mutual, says the issue centers on the use of reasonable factors for shadow accounts. He called it a sad day for actuaries when they cant stand up and say how they determine their reserves. This is a big deal to the extent that companies are this far underreserved.

Scott Witt, a life actuary with Northwestern Mutual, says some of the practices being advertised in conjunction with shadow accounts are 2-tiered interest rate structures using 2 different interest rate assumptions. Some rates are double-digit and not in line with todays interest rates, he says. The tier used in these cases depends on how well the contract is funded, he continues.

Actuaries are hiding behind a series of steps in the guideline rather than adhering to the intent of the guideline to establish proper reserves, Witt adds.

Koenig says potential solutions range from an additional filing requirement to action against offending actuaries.

Michael Barsky, an actuary with Guardian Life, tells regulators it is really a parity issue. There are, he says, 2 types of UL secondary guarantee designs: stipulated premium and shadow accounts.

Stipulated premium products, he says, provide that as long as required premiums are paid, the policy is guaranteed never to lapse. Shadow account products, Barsky continues, involve maintenance of a separate account value with different interest credits and expense charges than the actual account value. These designs provide that as long as the shadow account remains positive, the policy will not lapse.

Both shadow account and stipulated premium products are marketed to emphasize the required level premium needed to guarantee lifetime coverage, according to Barsky, and therefore, there should be parity in the reserves on the 2 designs.

It is a plain out abuse and frankly Im embarrassed for the profession, Barsky says.

However, Bill Carmello, a New York regulator, says more investigation is needed because conceivably some of the alleged abuses may be a legitimate product design not intended to circumvent the regulation.

Toward that end, a survey is being developed that could go out to companies, and a suggestion was made that the American Council of Life Insurers poll its members to gather the information.


Reproduced from National Underwriter Edition, May 21, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.